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Citadel’s Bumper Year Counts – It’s All Gravy Now

onJanuary 13, 2013

By Simon Kerr, Publisher Hedge Fund Insight

Although Citadel Investment Group’s flagship funds, Wellington Fund and the Kensington Fund, will rightfully get attention for rising 25.9% and 24.9% respectively, the Chicago-based Groups’ investment success in 2012 was broad. All of the Citadel hedge funds were up by more than 10% in a year when the HFRI Fund Weighted Composite Index gained 6.2%.

The Tactical Fund, a $1.27 billion high-frequency trading stock fund, reported a net return of 25.7 percent for last year, and the Global Equities Fund made a gain of 17.8 percent. For the last named a positive return is not unusual – for the last eleven years straight the Global Equities team at Citadel have made a profitable contribution to the firm.

Citadel founder Ken Griffin’s letter to investors on 2011 performance made a strong claim on what differentiates the firm from the competition:

“Constant idea generation fuels the success of our diversified investment portfolios. We believe that much of our competitive advantage in security selection is driven by a sophisticated understanding of the factors that move price. Our research efforts focus on understanding what truly matters in a data-rich world – and we do it better and more quickly than the competition.”

In the case of the Global Equities team the some of the effort is reflected in the 9,000 meetings with 2,000 different companies that are conducted on an annual basis. In total the Global Equities team travel more than 3,500 days, on more than 1,600 trips a year. The equity group in divided in seven industry sectors – Technology, Communications, Media and Entertainment, Energy and Utilities, Healthcare, Financials, Consumer and Industrial. So far so usual for a large asset management business. The same manager letter lays claim that the fund managers are better at establishing a variant perception from the market consensus on stocks. But the basis for the difference in view is not made clear.

Citadel does have some uncommon high quality data sources to utilise in taking views in an asset management context. Such an information edge is much more important than a view that a stock is trading a P/E point high or low versus the market view. The high frequency proprietary trading and market-making activities of Citadel are rich sources of data for flow analysis. The firm clocks more than 3 per cent daily trading volume in London, Tokyo and New York exchanges, about 15 per cent of the options market and nearly 10 per cent of the Treasury bond market.

The equity group also benefits from information gathered on behalf of the Citadel Energy Products , the energy trading group put together in 2002 from managers and traders from Enron and Aquila. For example, Citadel’s U.S. natural gas supply models incorporate a vast array of information from bottom-up sources. The short and long-term supply estimates are built on production forecasts for all the main and emerging production regions. On a daily basis, Citadel Energy Products monitors production from more than 20 basins and incorporates information embedded in the 30,000 nominations that take place on the interstate pipeline systems. Any deviation in supply from a major producing region quickly feeds back into the Chicago firm’s projections.

That is a high quality input in money management terms, and aggressive positioning on the back of superior market intelligence (and decent modelling) has paid off for Citadel in a way that really counts now. It was just over a year ago that Citadel marked the day that the firm’s main Funds went through their high-water marks. So the 25% gains for the flagship Funds last year are all gravy to the owners and employees of Citadel Capital LLC.